Global sourcing is a technique of strategic sourcing in the global strategy, which is an effective approach as a part of organization’s procurement section. The objective of global sourcing is to develop global efficiencies in the delivery of a product or service for the firms achieving a sustainable competitive advantage and this is an important weapon have been focused in the 21st Century.
The well-known organization, Hennes and Mauritz (H&M) is one of the largest international fashion retail and production house with the great deal of businesses all over the world. In the today’s competitive market and ever-changing environment, what distinguishes an organization that succeeds from others? The article is to explore and focus on the benefits, challenges and requirements of global sourcing for H&M by the means of a literature study, case interview and discussion with the fashion merchandising manager.
In the fast changing business environment, firms and enterprises have faced the increasing competition within the industry from all around the world, especially in the recent decade. The reason of the creating competitive pressure to firms is that which from the enhancing the quality but decreasing the price synchronously. The key of success is that the firms and organizations which treat “Global Sourcing” as a weapon fighting with its competitors. “Global sourcing is defined as sourcing the technology, materials and components from sites and supplies located throughout the world. It also means the integration and coordination of requirements across worldwide business units” (Monczka & Trent, 1991, pp2-7).
Currently, the developing countries of Asian and Eastern is both of the main sourcing regions and production providers to the world, these countries offers a great deal of low cost and skilled labours, relatively low price raw material which creating the ideal business environment to the buyer. H&M is one of the successful multinational fashion houses in the world. This study is to find out the importance and influence of global sourcing for H&M in terms of benefits, challenges and success requirement.
Benefits of global sourcing
Cost is one of the key factors determining H&M more successful in the fast changing market. ” stated by the interviewee, this is the most common reason that driven the firm starting sourcing internationally. Especially in the Apparel and Textile, which is the typical industry involving highly labour-intensive production. The labor and production cost account for a large part of the total expenses. As a matter of fact, according to the study of international journal of purchasing- “International purchasing: Benefits, requirement and challenges” by Laura M.
Birou and Stanley E. Fawcett was presented at the 1993 National Association of Purchasing Management that concluded that overwhelming firms began sourcing internationally is to obtain lower priced sources. Currently, the production source of H&M is mainly relying on the developing countries over the world such as China, Turkey, India, Indonesia, Cambodia, Romania and Bangladesh, and the interviewee commented that the advantage of production in the developing countries is to reduce the labor cost, so that enhancing H&M at the competitive position in the Fast Fashion Industry by maximizing the margin of profit to the business.
In 1993, Laura M. Birou and Stanley E. Fawcett reported that Quality was that the most important in that research. For H&M, Product Quality was the second important and that believed that will be enhanced in terms of through sourcing better production technologies and new materials internationally.
As the interviewee pointed out that the one of the purposes of global sourcing is to explore the new suppliers with advanced Garment Production Technology so that it is able to enhance H&M’s productivity and then shorten the lead-time, and secure the product quality in the mass production. Interestingly, it is the surprising reason of global sourcing for H&M that which able to stimulate the inerspecific completion among the existing suppliers by importing new supplies. As the interviewee said “Sometimes, our existing suppliers will contact us actively.
They offer us the attractive conditions with the aim of getting our orders. ” Also, she commented that this is effective method controlling the price and maintain the high product quality. Furthermore, on time delivery is one of the key reasons for H&M that why do they import more suppliers- able to reduce the product development time, and increasing the total productivity. “Aspiring the on-time schedule is vital important for the Fashion Industry. We don’t want to miss any good chance due to the late shipment. ” stated by interviewee.
On the other hand, by using information technology involving Quality Service is also considered by H&M. H&M adopts electronic data interchange (EDI) as a communication interface among H&M and its suppliers. As per the interviewee saying “This programme offers us a consistent communication standard so that both parties enable to acquire and share the most accurate information interactively, and the final objective is to eliminate any errors affecting the product quality and scheduling. ”
In 1993, Laura M. Birou and Stanley E. Fawcett reported that Global Sourcing can provide availability of foreign products at low price, which is exactly same as the interviewee’s comment “For instance, Italy is expertise of Leather Goods because its leather material and finishing is the best in the world; the lingerie technology in Guangdong, China is the best and cheap than Japan. ” Global sourcing can to optimize the range of product category and availability which is not available domestically through the global sourcing, according to the interviewee stated.
Requirement of Global Sourcing
Supported by Top Management
It refers to have a managerial support from the company. Extensive planning as well as the short-term and long-term development forecasts and contingency plans are involved this process. In this case, H&M have clearly defined the future development plan regarding 2 major aspects of the planning- Global Logistic action plan and the Company Long-term plan.
In the Company Long-term plan, H&M defines to continuously expend its corporate scale and the objective is to have 2 times scale than now, as per the interviewee said “Today H&M sells 2 million pcs/day. In 5 years it will be 4 million pcs/day” Nowadays, the new markets in 2008 include China and Japan, and will be opening the first store in Russia in 2009. In order to comply with the increasing logistic capacity, the comprehensible logistic planning is involved.
In the Global Logistic Action Plan, H&M identifies the logistic group need to enhance and upgrade the work flow in terms of accuracy, flexibility, and efficiency. Thus, H&M is planning to set-up new Distribution Center (DC), and Call-off (CO) in Europe to support the increasing internet and mail orders.
Establishing a long-term business relationship and supplier qualification
The interviewee agreed with that statement of Laura M. Birou and Stanley E. Fawcett reported in 1993 that “establishing a long-term relationships” with suppliers that is the key success secret operating business. H&M currently 100% rely on outsources production from over 700 independent suppliers. The interviewee stated that H&M must have a good reputation in maintaining good relationships with suppliers through ordering a large volume, letter of credit and guarantee the on-time payment.
H&M regularly take and review the action plan and keep always communication with suppliers. On the other hand, the problem to be involved during the global supplier sourcing is the foreign supplier certification/ qualification. Corporate Social Responsibility (CSR) is emphasized; the interviewee point out the all suppliers must be acquired a qualification reorganization from H&M auditor.
Knowledge of Foreign Regulations
According to the study of international journal of purchasing- “International purchasing: Benefits, requirement and challenges” by Laura M. Birou and Stanley E. Fawcett was presented at the 1993 National Association of Purchasing Management that report that “Establishing foreign buying offices” was the last important among the high amount of multinational companies.
On the contrary, the interviewee point out that is important to them; H&M owns the number of buying office allocating in China, Korea, Cambodia, Hong Kong, and Bangladesh with full-time employed staffs and specialist equipped with experts on the local marketplace can compensate for the knowledge in managing the individual supply chain and to manage the regulations in the textile quotas, law regulations and corporation tax respectively, and it can assure the product quality. The top management supports them to provide internal training which allows staffs to know the global network and the operation of the supply chain.
Challenges of Global Sourcing
Understanding the political environment is the last important among the high amount of multinational companies. According to the study of international journal of purchasing- “International purchasing: Benefits, requirement and challenges” However, interestingly, the interviewee stated that is the first challenge for H&M.
“Political stability is essential to economic prosperity, and it is a key element for operation business. stated by the interviewee, can reflect the Political Environment is very important factory conducting business activities in these countries. Recently in Thailand, the anti-government demonstration caused the Bangkok city in turmoil. The interviewee believe that this political threat is also a typical challenges that H&M is currently encountering and preventing the development and implementation of international sourcing strategies.
Finding Qualified Sources
Another strategic concern is finding and identifying qualified foreign sources which are the great challenge for H&M. Besides the understanding of the foreign business practices, Corporate Social Responsibility (CSR) is one of the curial regulations that all suppliers must follow and qualify the audit by H&M. CSR is a standard of responsibility for the degree of influence of people and the environment are affected by the corporate activities, such as child labour, illegal pay, and unsafe working environment and discrimination and abuse, these behaviors and factory environment set-up are all against Code of Conduct of CSR regulation which have been highly focused and emphasized among the multinational company today.
H&M annual report, 2007) Apparel industry is one of the most highly labor-intensive industries; unfortunately, work against CSR’s regulation is quite common in the industry. H&M is encountering the challenge that to have some difficulties in the sourcing the qualified suppliers. The interviewee point out an example that Gap had experienced on employing child labor to produce its garments.
Quota System and Exchange
Rate Quotas and Tariffs and various kinds of international trade fee are the most directly influential trade regulation affecting the firms including H&M. The interviewee stated that Quota and Tariffs system is most strategic regulation established by there local government, which is threaten the foreign company doing business and it is also a factor affecting the firms consider to that place as a sourcing country. Exchange rate is one of the key factors to H&M, according to the interviewee “US dollars is H&M standard currency, when the US dollars increase, the purchasing cost will be increase. ”
Relationships between Competitors
Fighting sources with competitors is also the challenge to H&M. As H&M share some factories’ capacity with other Fashion House, such as Esprit, Zara, and Walmart etc. so H&M should build up a good relation with the suppliers to make sure sufficient providing source.
In the fast changing business climate, firms and enterprises have faced the increasing competition, and global challenge within the industry from all around the world. To become a success winner in the cruel marketplace, H&M needs to continuously maintain good reputation is crucial which is the determining factor increases its competitive power so that it can win/ attract the existing or the potential suppliers as our partners. For instance, no late payment is a successful action kidnapping the supplier’s heart. Moreover, maintaining the long-term relationship with the current business partners is also important to H&M. These key determining factors is concerning whether the enterprise successful, so gaining the top management support is irresistible.
H&M need to have a short-term and long-term strategic action plan regarding above points. Furthermore, finding a stable business environment with qualified suppliers to meet the Code of Code of H&M is very critical it is the necessary policy to take responsible for the people and the environment. Finally, securing the product characteristic, quality and price is the key elements determining the company being successful. The suggestion is H&M must set-up a buying office in the target sourcing regions and engage the local product specialist to increasing the company competitive power.
Global sourcing is undoubtedly true that is a key weapon winning it competitors by offering a great deal of benefits including price, widening product category and improving product quality. On the other hand, the challenges of global sourcing are some factors need to be managed and considered in selecting the suppliers from different country, e. g. political environment, country’s textile quotas and exchange rate. To manage those risks, the top management requires long term perspective in defining the company’s goal and strategy.
In order to implement global sourcing successfully, it also requires the experience and commitment of the management in managing the risks and understanding the foreign regulations. In addition, H&M outsources all the production to over 700 suppliers, H&M needs to maintain the good and long-term relationships with all the existing suppliers. Despite it is rich in challenges and difficulties when conducting sourcing globally. Social Responsibility is one of indispensable factors to be considered. Balancing Social Responsibility and Business Benefits is the real challenges for H&M.